Steffen Kindler - Head, IR Mark Schneider - CEO François Roger - CFO

Celine Pannuti - JPMorgan Jean-Philippe Bertschy - Vontobel Jon Cox - Kepler Cheuvreux David Hayes - Bank of America James Edwardes Jones - RBC Mitch Collett - Goldman Sachs Jeremy Fialko - Redburn Pinar Ergun - UBS Patrik Schwendimann - Zürcher Kantonalbank Alex Smith - Barclays Toby McCullagh - Macquarie

Good morning, good afternoon, everyone, and welcome to Nestlé’s half year conference call. I’m Steffen Kindler, the Head of Investor Relations. Here with me is our CEO, Mark Schneider; and our CFO, François Roger. As usual, we will first present our numbers and business overview and afterwards will open up for Q&A for analysts. [Operator Instructions]. I will take the disclaimer slide as read and with that, I hand over to Mark.

Thank you, Steffen. And a warm welcome to our First Half 2017 Conference Call. As always, we appreciate your interest in our company. François, and I will be happy to take you through our first half results and answer your questions. Before turning it over to François, a few comments from my side. First, I would like to ask for your understanding that we were limit our comments in this call to the results and specific actions of the first half of 2017. We would like to do the same in our Q&A session later on. While I understand that there is considerable interest in our future strategic direction, the Investor Day in late September will give us ample opportunity to discuss this in greater detail and with the necessary amount of context. Next, let me turn to sales for the second quarter and first half. As mentioned in our press release, organic sales growth was below our expectations, even though we’re clearly inside our organic growth guidance range for the year 2017. In this context, let me briefly explain why we said that our organic sales growth is likely to be in the lower half of the 2% to 4% range. We’re committed to shareholder-friendly communication and as such, it was important to give you our realistic view on where we would likely come out for the full year. And while we expect improved organic growth in the second half, the weaker first half needs to be properly reflected. While the muted sales performance in Q1 had some very simple and straightforward explanations, in particular the challenging calendar, the situation is more nuanced in the second quarter. We saw a very encouraging picture in our Zone AOA, in particular of the fact that we returned to positive organic sales growth in China, in Q2, while the strong organic growth in Southeast Asia, and in Africa, continued. Our Zone AMS accomplished a slight improvement in volume growth in North America as well as in Latin America. The sort of growth in PetCare in the U.S. was encouraging and vindicates our interest in this category as one of the keys future growth drivers for our group. Zone EMENA saw a drop in volume in Q2 mainly due to Western Europe. We consider most of this temporary in nature, in particular of the short-term reaction to our pricing action and the impact on some of our categories from the warm weather. Among the globally managed businesses, Nestlé Nutrition continues to struggle in China, and eked out only slightly positive growth in the U.S. market. We expect improvement in both markets later this year. When it comes to margin, we saw a mixed picture. On the one hand while our cost reduction efforts are clearly getting traction, combined with portfolio changes in pricing, we gained 100 basis points of profitability through these efforts. And this is early in the game. On the other hand, our commodity costs kept going up by a comparable amount, wiping out all of this potential margin upside. This is the first such commodity basket price increase in several years. Regarding restructuring expenditure, we’re already at CHF 166 million this year and confirm our CHF 500 million target at a minimum. We’re, in fact, evaluating the acceleration of further restructuring projects, which might get us beyond our restructuring spend target in 2017. We plan to have an update for you on this by the time of our Q3 conference call. In summary, while the first half results were soft, I’m pleased with the overall progress we are making on our value creation agenda. This includes, in particular: First, improving some of our underperforming assets like Yinlu and our Gerber baby food range in The United States. Second, our cost-reduction efforts. Third, portfolio management such as the recently announced review of our U.S. confectionery business. Fourth, several small to midsize acquisition projects that we’re working on in high-growth areas. And, finally, the decision to increase balance sheet efficiency through higher leverage. This is still early days and I realize that the P&L benefits of lot of what I just talked about are not showing up in the numbers yet, but things are definitely moving in the right direction. With that, let me hand it over to François. François Roger: Thank you, Mark. Good afternoon to all. We finished the first half results with sales of CHF 43 billion, which represent a slight decline of 0.3% on a reported basis. Our organic growth was 2.3% with 1.4% contribution coming from RIG and 0.9% contribution from pricing. Foreign exchange was a mild headwind of negative 0.3%. Mid-divestments reduced reported sales by 2.3% for the most part attributed to the creation of the Froneri joint venture. If we look at the trading operating margin before net other trading items, meaning before restructuring and others, it increased by 10 basis points in constant currency. Both restructuring expenditure and net other trading items overall increased by 77% to CHF 166 million and CHF 349 million respectively. As a consequence, trading operating margin was down 20 basis points in constant currency to 15.1% or down 30 basis points as reported. This largely reflects the acceleration of our saving program. I will go into more details on our margin in the upcoming slides. As I speak about the margin evolution for the 6 operating segments, I mean the zones and the globally managed businesses as well as the product segments, I will focus my comments on the results before net other trading items. This is what we call the underlying trading operating profit and it is, therefore, before restructuring. We believe that analyzing the returns of our geographies and categories before one-offs provides a better view of the real underlying performance -- business performance, particularly for the purpose of today’s call. This is also consistent with the way we define underlying EPS and therefore should provide additional clarity on the calculation. For transparency reasons, we have provided a reconciliation between trading operating profit and underlying trading operating profit as well as the definitions in the supporting slides of this presentation. So next slide shows our organic growth over the last 10 quarters. Our results of 2.3% for the first half was below our expectations. In general, we continue to see weak consumer demand and a challenging retail environment particularly in Western Europe and North America. We have been facing specific challenges this quarter in Zone EMENA where price increases and weather conditions have affected volumes and this has been impactful at group level. In addition, softness in both Nestlé Skin Health and Nestlé Nutrition have impacted our performance this half. I will go into more details on to dynamics by geography and category shortly. Yet, in spite of these specific challenges, we remain encouraged by our RIG development. A sustained contribution from RIG shows that we bring relevance to our consumers and that we optimize our product mix. Pricing for the first half remained subdued at 0.9%. The volatility of commodity cost means that we take a pragmatic approach when raising prices. Price increases have to be sustainable relative to the commodity movements to secure price competitiveness. Looking at the geographic breakdown now. This slide illustrates the combination of our sales for the Zones and globally managed businesses combined. Our growth is broad-based, both in terms of organic growth and RIG with all geographies in positive territory. AOA continued to hold good volume led growth. Meanwhile, RIG has been softer in AMS and EMENA mainly due to the challenging consumer environment as mentioned earlier. Looking now at the contribution for developed and emerging markets, both geographies contributed positively to RIG and OG. In the developed markets, RIG was solid at 1.1% despite the specific challenges already mentioned, such as softness in EMENA and generally weak consumer confidence on deflationary pressures, resulting in a challenging pricing environment. In the emerging markets, organic growth was 4.4% with RIG of 1.9% and pricing of 2.5%. Meanwhile, on pricing, in the developed markets, pricing remains negative. Also on a generally improving trend versus the last two years. And in the emerging markets, we have exactly the opposite dynamic where the contribution from pricing is progressively smaller. Moving to Zone AMS. Sales were CHF13.3 billion. Organic growth was 1.3% and this represents a meaningful improvement in RIG from Q1. Pricing of 1.4% came mainly from Latin America, but even North America finished the first half with positive pricing. Looking in details at the two sub-regions. North America continued to face an environment of soft consumer demand and an overall difficult trading environment. In this context, we achieved broadly flat growth for our North American business. Coffee creamers continued to deliver good results and PetCare made a return to solid growth in the second quarter. Confectionery remained weak and ice cream was impacted by unfavorable weather condition. In Latin America, RIG improved since the start of the year and pricing remained positive. Brazil was negative over the first 6 months of the year, but improved significantly helped by a recovery in RIG, which was actually positive in the second quarter. That said, as far as Brazil is concerned, we remain cautious on our outlook. Mexico had good growth despite weak consumer confidence. PetCare remained a strong growth driver for the region. Margin-wise for AMS, we actually improved our underlying TOP margin by 30 basis points. While we had higher commodity costs, these were more than offset by efficiency savings. We also saw some initial benefits from our restructuring projects. Moving now to Zone EMENA, with sales of CHF7.8 billion, organic growth was 1% comprised of 0.6% of RIG and 0.4% of pricing. We improved on pricing since Q1. However, this was offset by meaningful deceleration in RIG. As mentioned before, EMENA’s growth was below our expectation. Until this quarter, we had an average RIG north of 2% over the last 5 years. And now we have fallen into negative RIG this quarter. We applied price increases in Nescafé across many markets in the zone and this resulted in a contraction in volumes in recent months. We know that price increases usually impact volumes in the short term. In addition, in Western Europe, the seasonality of our business has changed following the spinoff of ice cream to Froneri. The hot weather in recent months, and especially in June, had affected performance in confectionery, coffee, pizza and culinary. And we no longer have the benefit of ice cream in our portfolio in EMENA, which used to offset such an effect. Looking now the dynamics by subregion. In Western Europe, PetCare sustained its RIG-driven growth. In Eastern Europe, organic growth accelerated since the start of the year driven by strong RIG. PetCare remained a strong growth driver especially in Russia. In Middle East and North Africa, organic growth decelerated moderately but remained positive. The region continued to be affected by political instability and sustained deflation. Margin-wise the zones underlying TOP margin increased by 50 basis points. Higher commodity costs have been more than compensated by price increases, cost savings as well as portfolio management. Zone AOA, we had sales of CHF7.9 billion. Organic growth was 4.8%, representing the fifth consecutive quarter of sequential growth. RIG of 3% and pricing of 1.8% both represent an increase versus the previous year. In China, we remain negative in terms of both RIG and pricing for the first 6 months. However, there has been a meaningful improvement since the start of the year for both components and we even had a positive growth in Q2. The improvement was largely coming from Yinlu, confectionery and culinary. In the other regions, sub-Saharan Africa and Southeast Asia performed well with healthy organic growth on RIG. India delivered good growth despite the uncertainty around the introduction of GST in June. And in the developed markets, Japan sustained good growth, while Oceania remained affected by pricing pressure. Margin for AOA. The underlying TOP margin decreased by 20 basis points. Input costs were up. And we made some marketing investments in order to turn around Yinlu. And we’re happy to see encouraging early results from these investments. Moving now to Nestle Waters with sales of CHF 4 billion. Organic growth was at 4% driven by RIG of 3.5%. Pricing stayed in positive territory coming in at 0.5% for the half. Our growth was generally broad-based. We had an acceleration in Q1 in the last 3 months, helped by favorable weather conditions especially in Western Europe and North America, which delivered strong results in spite of pricing pressures. Perrier continued to be a highlight sustaining double-digit RIG for the sixth consecutive quarter. And San Pellegrino continued to do well. In emerging markets, Latin America and China drove growth. On the margin front, the underlying TOP margin held stable. Increased PT cost were basically fully offset by efficiencies and increased structural savings. Moving to Nestlé Nutrition. Sales were CHF 5.2 billion. Organic growth was soft at 0.9%. Also RIG improved slightly to minus 0.2%, pricing decelerated to 1.1%. In our largest market, China, performance was mixed. Despite an encouraging start to the year, growth was slightly lower in recent months. We have seen growth from illuma and NAN but it has been offset by a decline in S-26 Gold. Parallel imports continue to provide challenging competition and parallel imports are taking market share, but, as you know, we limit our exposure in this area. We have recently launched a full organic illuma range in Hong Kong, with plans to expand further into China. In the developed markets, growth was slightly negative overall with weak category dynamics. Although the U.S. remained soft, it was helped by the stabilization of the Gerber brand. We plan a comprehensive relaunch in the second half of this year, which incorporates organic growth, organic products, new formulations, cleaner labeling as well as new visuals and packaging. In our emerging markets, the Philippines and India were strong, with price increases -- while price increases put pressure on volumes in Brazil and Mexico. Margin-wise, for Nestlé Nutrition, the underlying TOP margin increased by 130 basis points. Our price increases on premiumization largely offset commodity headwinds from higher milk prices. But the large improvement in profitability was mainly driven by significant structural savings in non-consumer facing activities, mainly in The United States and in China. Finally, Other Businesses, which covers Nespresso, Nestle Health Science, and Nestlé Skin Health, sales were CHF 4.8 billion. Organic growth slowed to 3.7% as RIG of 4.5% was offset by negative 0.8% pricing. Starting with Nespresso, which sustained good mid-single digit growth accelerating from the start of the year as all geographies gained momentum. We continue to enjoy mid-single digit growth 30 years after the creation of Nespresso and in spite of competition from compatibles. Growth in North America and Latin America continued at a double-digit pace. We also had encouraging performances in the U.K., in Spain and in the Netherlands. Nestlé Health Science decelerated slightly since Q1, but still maintained mid-single digit growth. Medical Nutrition had good growth across all geographies. Consumer Care did very well in Asia and in Europe. But the performance was offset by the U.S. where growth was negative. Nestlé Skin Health remained positive, but decelerated from the first quarter. Pressure from generics in the prescription business weighed on growth, as did China’s soft performance. And additionally, we had difficult comps this year. Margin for Other Businesses, overall the underlying TOP margin fell by 270 basis points as we invested in marketing and distribution behind the three businesses. And this is especially true for Nespresso where we have opened more than 40 new boutiques so far this year. But it is also true for health science where we’re accelerating our investments behind all brands. Nestlé Skin Health’s margin was marginally down. Moving now to the growth by categories. We see the amount and composition of growth by product groups on this slide. It is worth mentioning that this year-to-date performance is still be some impact from the leap year in Q1. This chart illustrates our portfolio strengths and its consistency across growth categories. Excluding confectionery, which was impacted by the timing of Chinese New Year, we can see that the gross contribution by category range from 1.4% to 4.2%, which are little relatively close to the group average at 2.3%. Important to note as well that coffee, water and PetCare delivered strong results this half, confirming their role as growth engines for the group. Let’s discuss in more detail the evolution by product group since Q1. For powder, the liquid beverages, the softening was essentially due to a lower RIG coming from pricing taken in Nescafé EMENA. Waters are already covered. Milk products and ice cream, it improved on all metrics. RIG, pricing and consequently OG. While ice cream was negatively impacted by difficult comps in the U.S., ambient dairy accelerated with good growth and creamers continued on its strong trajectory. Nutrition and health science were discussed. Prepared dishes and cooking aids was led by ambient culinary, which did particularly well in the emerging markets. Frozen was affected by difficult comps versus last year. Confectionery remained negative but showed meaningful improvement especially in RIG. And as you know the timing of Easter and Chinese New Year impacted this category in Q1. Finally, PetCare, we finished the year half strong, thanks to a marked acceleration in the last 3 months. The U.S. business recovered from its slow start at the beginning of the year and the emerging markets continued to deliver double-digit growth. Moving now to the profit evolution by product category for the first half. As a reminder, this is before restructuring, which is a better indicator of the underlying performance. For your information, the reconciliation with the trading operating margin after restructuring can be found in the supporting slides of this presentation. Most categories have been affected by the increase in commodity cost. Powdered and liquid beverages, nutrition and PetCare continued to deliver strong overall margins for the group. Looking at the dynamics by category. The decline in powdered and liquid beverages is mainly due to the investments made towards opening new Nespresso boutiques. Confectionery was impacted by higher input cost, namely sugar and dairy, which more than offset lower prices for cocoa. PetCare’s margin saw a slight contraction mainly due to the investment made behind dry dog in the U.S. such as product reformulation and brand support. On the positive side, the margins for prepared dishes and cooking aids grew very nicely, helped by good growth particularly in ambient culinary and due to some benefits coming from portfolio mix. Moving now to our gross margin. Following 4 years of improvements, of progressive improvement, our gross margin showed a marginal decline this year. We incurred around CHF450 million of additional commodity cost in this half year, which translated to about 100 basis points of additional headwind. We have been able to compensate for nearly half of it through efficiencies and pricing at gross margin level. If we take a look at our half year margin before restructuring, it increased by 10 basis points in constant currency. The chart here shows the moving parts of our margin evolution. Commodity costs were significantly higher coming in at nearly CHF450 million more than last year, as I mentioned earlier. We expect the full year launch of the increased commodity prices to be around CHF1 billion for 2017. This is a significant swing compared to the last few years when we enjoyed regular decreases of input cost. At the same time, through pricing, efficiency projects, including the early benefits from restructuring as well as portfolio management, we generated 100 basis points of margin improvement. Our cost-reduction was not driven by cuts in brand investments as consumer-facing marketing spend saw only a marginal decrease. Our R&D investment also remained stable. Rather, the improvement was mainly due to efficiency, and restructuring programs in operations, in procurement and in G&A. These savings are sustainable, they are material, and they illustrate well our commitment to cost discipline. And we have another 20 basis points contribution from currency and other revenue, in total bringing the underlying TOP to 15.9% for the first half. EPS, reported EPS increased by 19% to CHF1.58. Last year, we were impacted by one-off non-cash adjustments to deferred tax. So if we look at our underlying EPS, it increased by 2.1% to CHF 1.68, that is, a 3.4% increase in constant currency. Moving to our working capital. The chart illustrates our commitment and focus on reducing working capital. The 130 basis points decline shows that over the last 12 months, we continue to make improvements on our working capital as a percentage of sales on a 5-quarter average calculation. Following several years of significant progress in working capital reduction, we continue to see opportunities for further improvement in the future, but we believe that it will come at a more moderate pace going forward. On free cash flow, we declined our free cash flow generation by CHF 2 billion on a year-on-year basis from CHF 3.3 billion to CHF 1.3 billion. The largest contributor to this decline was coming from working capital, resulting in a negative effect of CHF 1.3 billion. It represents a lower level of working capital improvement versus the same period of last year. And this was mainly coming from commodity price inflation, and the phasing of payables for both marketing and CapEx. In addition, in half year 2016, we benefited from one-off tax refund of CHF 300 million, which by nature did not occur this year. Despite this negative cash impact from working capital, continued progress was made to structurally reduce net working capital on our balance sheet, as I mentioned earlier, resulting in a further reduction of close to CHF 600 million as of June 2017 for our working capital compared to June 2016. That brings me to my last slide. We confirm our full year guidance for 2017. But organic growth is likely to be in the lower half of the 2% to 4% range. We confirm as well our target of CHF 500 million of restructuring investments in order to drive future profitability. We’re reviewing the feasibility of accelerating our restructuring program in 2017, and we will share further information in September or October. On the bottom line, we expect to reach a stable trading operating profit margin in 2017 in constant currency. As a reminder, this trading operating profit is after restructuring. And we expect to achieve underlying constant EPS growth -- constant currency EPS growth and improved capital efficiency. With that, I’m now handing over to Steffen to manage the Q&A session. Thank you. A - Steffen Kindler: Thank you, François. Next we start our Q&A session for analysts [Operator Instructions] We go ahead. The first question comes from Celine Pannuti from JPMorgan.

My first question is relating to organic growth, which you said didn’t really meet your expectation and clearly there was maybe softer pricing than expected. Am I right in believing that, that soft pricing recurs in the second half despite you having as much commodity costs in the second half? And beyond just pricing, could you just well comment on how you feel you fared competitively in terms of market share performance? My second question is on margin. You said that you -- so in the 100 basis points that you mentioned in terms of savings, was there any benefit from the 200 basis points total savings program already in the half? And when you say you’re accelerating the margin improvement initiative, do you mean that this will come faster than the 2019-2020 you said, or are you seeing more opportunity above and beyond the 200? François Roger: Celine, good morning. On the market share, our market share is slightly down, but I would say if we exclude Water, U.S. on which we voluntarily refrained from grabbing market share at the lower end of the market, if we exclude that, our market share is basically flat. You talked about the margin improvement of 100 basis points. If I understand your question, which was about the component coming from our structural cost initiatives, during the first half of the year we had little bit less than CHF200 million offsetting which was coming from our structural initiative. So it’s starting to gain traction. So we are probably at the pace of about CHF0.5 billion already for this full year 2017. So you remember that this program is a three year program. So I think that it showed that we are getting traction on that front. On pricing, so you saw that our pricing remained at 0.9%. We remain a little bit cautious on pricing, especially the part of pricing which is linked to commodity pricing. We have seen, and you saw it in our P&L, a significant increase of commodity pricing, which is something that became obviously already nine months ago. And you know that there is a time delay anyway, which is our P&L. So we did take some price increase as a consequence. But over the last two to three months, we started to see an inflection point on commodity pricing moving down again. So that’s the reason why I said that we need to be careful with pricing going forward, given that we want to make sure that any pricing action we’re taking is sustainable versus both commodity pricing and competitive forces in markets. I remind you as well the pricing is a local decision. So it’s very much linked to very specific competitive situations in a given market.

Okay. That gets us to the next question. Jean-Philippe Bertschy from Vontobel. Hello Jean-Philippe, please go ahead, two questions. Jean-Philippe Bertschy: Thanks, good afternoon gentlemen. The first one would be on Nestlé Skin Health. And you are not surprised I’m asking the question. How high is the level of your patience? And I would ask as well if you can give us some more color on what’s happening actually with Nestlé Skin Health and the performing for a couple of quarters? Especially if you can give us maybe a time line about the patent expiry you still have in your portfolio. And the second one would be on Nespresso, significant margin drop in H1. Maybe if you can give us as well some indication on how you see the profits margin going forward, and if the margin drop was mainly linked to this store opening or if you are seeing some pricing pressure as well? Thank you.

Jean-Philippe, let me take the first one. This is Mark. So on Skin Health, I just don’t want to leave you with the impression that we are just watching there and doing nothing. We’re not happy about the results for sure, but I think over the winter and spring now, we’ve started to take fairly decisive action under the new leadership team. And so there is no specific time line I could share with you about patience or not having patience anymore. I think it is about putting in place those changes that are needed to succeed in the future. I have confidence that the new team is doing that. And we’re also looking at a better second half compared with the first half. François Roger: As far as Nespresso is concerned, Jean-Philippe, so the pressure on the margin from Nespresso is mainly coming from the opening of these 40 new boutiques. To a certain extent you have little bit of commodity pricing as well. But it is not coming from a price pressure. We keep on having very, very consistent price on the Nespresso capsules. There is no pricing pressure there.

Okay. The next person is Jon Cox from Kepler Cheuvreux.

Just 2 questions. One on confectionery. Obviously, North America remains pretty fragile as we’ve seen with other people reporting. I know that some one-offs, Easter, Chinese New Year, but you confirmed that some of those trends in North America namely the move to healthier snacks and maybe move online in terms of shopping is having an impact now in confectionery in the rest of the world. That’s the first question. Second question, just on prepared dishes and cooking aids, prepared dishes. You mentioned frozen. It looks like the slowest growth figure we have seen for a couple of years now since the reboot we saw in North America. Are you concerned there is more to it than just the fact you are lapping difficult comps, or do you think there is a structural issue with that market as well?

Jon, let me take the first one and also latch on to the announcement of early June, when it comes to the review of the U.S. confectionery business. So we look at very much strong local brands here in the U.S. market. They do have an iconic standing in the U.S., but they are mostly limited to the U.S. market. And so we’re not seeing a particular spillover effect here from what’s happening in the U.S. market into other markets. In fact with our announcement we’ve made it very clear that we remain strongly committed to the confectionery business in other parts of the world, because we are benefiting from one very strong global brand, as you know, KitKat and then, of course, also many, many strong and iconic local brands with meaningful market shares. When it comes to the U.S. situation, I just wanted to confirm that we have seen significant interest in our business, both from strategic and financial buyers. And, of course, while we would like to retain flexibility, when it comes to the ultimate solution and while we’re open towards creative deal proposals, I also wanted to confirm that our clear priority is a straight sale of the business. The process is on track as we announced it in early June, and we hope to complete the process by the end of this year. François Roger: Jon, as far as frozen food is concerned for the U.S., the main reason for the softness during the quarter is the comps. So we remain with a positive growth for store frozen pizza, for example, in the U.S. It was more on the Lean Cuisine side that we have been impacted by tough comps. But, and also there is no real underlying issue there. It’s a timing issue and comps.

That gets us to the next person. That’s David Hayes from Bank of America.

Just to come back on the pricing you talked about, I guess specifically in the EMENA region. And you said that you saw the reaction to taking pricing up. I wonder if that was, can you tell whether that is more retail or whether that was delisting in certain cases of product lines or whether that was a consumer reaction? And I guess and related to that, thinking about the coffee pricing you talked about, you talked that the competitors weren’t following you as you were leading pricing up and you weren’t followed. And I guess, related to that, would you say that the online, increasing online element of the business means that taking pricing becomes more problematic because the consumers see those deltas quite quickly, perhaps quicker than before?

David, this is Mark. You are right. A lot of it was centered on coffee. Our take is that most of this came from the trade, the classic short-term reaction following pricing action. And as you look at some other regions, so take for example, Latin America coming out of last year now into this year, these items tend to be transitory. So overall this abstract theme like how does the consumer react to pricing in a more online driven age, I don’t think that had a meaningful impact yet on this second quarter situation.

Good. That gets us to the next person that’s James Edwardes Jones from RBC.

I see you reiterated the guidance of flat margins of 2017. But at this time you were talking about the possibility of increasing restructuring cost. Can we take that guidance of flat margins will be sustained whatever you decide to do to restructuring costs?

James, this is Mark. It really depends on how much in addition we find. And hence, let’s reserve judgment on that give or take, either, as François said, by the time of the Investor Day or by the time of our Q3 conference call. But, of course, these 2 items are connected. And so if we find a lot, we may not be able to hold it up. If we find little and we overshoot at the same time on some our savings initiatives, we may be able to cushion it.

Okay. Next person in line is Mitch Collett from Goldman Sachs.

Couple of questions on Nutrition. I think you said that you were seeing -- oh, you said input costs are going up, I noticed that pricing in Nutrition has decelerated. Perhaps you could give us a bit of color on why those 2 are moving in different directions. And then secondly, I think you also said that non-consumer facing activities in the U.S. and China has seen savings. I just wondered specifically what those were? François Roger: Mitch, so on Nutrition. Pricing has improved somewhat on Nutrition, especially as the commodity pricing has put some pressure on the entire industry and category, because the price of milk is actually higher. But we have been able to increase our margin more by finding savings on G&A. So what we said is that we did not cut marketing spend. These are in the U.S, not in China. But we focused really on being more efficient in our G&A cost, which is exactly what we have done. And the margin improvement as a consequence is quite significant because we improved it by 130 basis points.

Okay. That makes us move on to Jeremy Fialko from Redburn.

Just one question from me. So on the U.S. PetCare business, obviously it was quite gratifying to see that did improved a bit in the second quarter versus the first quarter. Could you talk a bit about what you did to engineer that improvements? And also, in particular, your online growth in PetCare? That is a category which has seen very, very fast growth in online, and whether you think that your sort of online market shares are now getting close to your offline market shares, so that you’re not sort of structurally losing out as the trade moves?

Jeremy, this is Mark. It didn’t have so much to do with online versus not online. I think most of it simply was the timing on some of our plant renovation rollouts and so it was -- it would’ve occurred at any moment in time when you are basically switching over from an older product to a newer one.

Next person is Pinar Ergun from UBS. Please go ahead.

First one is on marketing spend. You mentioned in your press release that it was down slightly as a percentage of sales. Any chance you could quantify that? And my second question is on Skin Health. This division has been challenged for a while. Just wondering what’s the level of your strategic commitment to this business, is the long term gain worth the short-term pain and why? François Roger: The marketing spend in absolute value has declined by 1.8% in Swiss francs.

And, Pinar, on the Skin Health as we discussed earlier, at the moment it’s really our full focus on improving the operating situation and that is again reviving organic growth and also working on the structural cost of the business. So we will put that in place and then see what that’s getting us.

Next person in line is Patrik Schwendimann from Zürcher Kantonalbank. Patrik, please go ahead.

Hi Mark and Stephen. What is your best guess estimate for the input cost for 2018? I know its early days. But you mentioned in the last two to three months an inflection point. So I wonder what you are expecting here? And second question, you are expecting an improvement in the trading operating margin in H2 of roughly 20 basis points in local currencies. Which product categories and regions are the main drivers behind that improvement? François Roger: Patrik, let me take the first one. And as you suspected, I think it’s pretty hard at this point to give you a concise estimate for 2018. So it’s the old notion, that may go up, that may go up, that may stay flat, but not necessarily in that order. It’s just, as you see, even in the first half there was some surprise moves where some upward movements were not continued and trended down again. So this is a fairly volatile H and I think we have to take it with a fairly short time horizon. Patrik, I prefer not to give any guidance on the distribution of the trading operating margin improvement for the second half of the year. So we’re working on it. We know what we have to do overall and we’re confident about maintaining this trading operating profit flat, but the distribution between the regions and the categories we keep it for ourselves as a task for the time being.

Okay. Then next in line is Alex Smith from Barclays. Good afternoon Alex. Please go ahead.

Couple of questions for Mark, please. Mark when you first spoke to us in February, you talked about wanting to make Nestlé a more agile and consumer responsible organization. So I’m just wondering how your thoughts on that might have evolved over the last five or six months. And what changes you might be looking to implement to effect that change on the speed of the organization? And then the second question on the role of Nutrition in the growth equation. I think you spoke again today about the key growth engines being coffee, PetCare and water. But I think I noticed on your press release announcing the buyback. You spoke, of Nutrition being within that group. I’m just wondering if there has been a reassessment there given the historic contribution of that category to your growth or if it is still missing on the list? Thanks.

Yeah, Alex, thanks for both questions. And with regards to the first one, I can confirm that this whole notion of being agile and speed in everything we do is very important, very high on my agenda. In line with what we said earlier in the conference call, I’d like to leave the forward-looking thoughts to our Investor Day in September, but my assessment on that and the need of being more agile and faster, that has certainly not changed from the February conference call. When it comes to Nutrition, you’re absolutely right and very observant on your part. So we added back to the list. And the reason we added it was that we’re really talking about in slightly different context between February and the June announcement. In February, when I listed these 3 areas: Coffee, PetCare and water, it was under the organic growth header. And I was trying to explain that if we accelerate our growth plans in those 3 above par areas, that this will help our organic growth overall. And, as you know, our organic growth in 2016 of Nutrition was not that impressive and hence if I had added it to the list at that point, it simply would not have made sense. The statement in June was different in nature. This was, sort of, strategic growth areas where we also think about additional capital deployment. And yes, long-term, Nutrition is absolutely one of our core businesses. I mean this is the business that the company was founded on and we believe that going forward there are very attractive fundamentals that continue to apply into the future. And it’s, as you know, a business where we also are the leading company in terms of market share. So yes, from a strategic point of view, the fact that this is core, it certainly had to be on that list. But in February, I was talking about organic growth only and since you know, that we’re going through a bit of a difficult patch, I felt at that moment to add Nutrition didn’t make sense. I hope that explains the difference.

Al right. Then we go to Toby McCullagh from Macquarie.

Just 1 actually. You flagged Nespresso as being a big cause of the margin pressure. Is it fair to back into Nespresso margins being down around 300 to 400 basis points in the period. And, apologies if I missed it somewhere, what’s your plan for further store openings this year. Is Nespresso going to be a similar drag on margins in 2H as it was in the 1H? Or is that drag going to drop, which would help us make the bridge for, to expect better margins in the second half of the year given that the input cost, look as if they’re going to continue at about the same level?

Toby, I’m glad you are bringing this up so that we can have a chance to clarify. I wouldn’t call this margin pressure. I mean we had significant additional store openings in the first half and, as you know, they take a bit of time before they become accretive. And obviously, we would not have increased the number of store openings by that much, if we didn’t see substantial positive growth prospects for this business going forward. So this for my end, while its OpEx, it’s clearly an investment into the future. And when it comes to the fundamentals of the Nespresso business, our assessment has not been changed. It continues to be very, very positive. We’re huge fans.

Okay, with that, we come to the end of our session today and the end of the Q&A. Thank you very much for joining us today, and we talk to you again at the occasion of our 9 months earnings call in October. If you have questions in the meantime, you know how to reach IR under, per telephone or per e-mail. Take care, and have a good rest of the day. Bye-bye.